A blog about economics, finance, business and corporate governance. My background is in economics, with degrees from Columbia and Johns Hopkins. A career in international development, equity capital markets and as a corporate finance chief and board member lead me to think about events in a different way--hence the blog's name.

Wednesday, January 22, 2014

Morgan Stanley on Emerging Markets

We have posted before about the fact there many fewer diamonds than paste among emerging market mutual funds touted to individual investors.

Today, Ruchir Sharma of Morgan Stanley Investment Management, whom we cited in the above post, has revisited the whole lure of emerging markets in the Wall Street Journal. What he says in this piece effectively outdates some of the material in his book.

Mr. Sharma writes,

"Commodity prices rose 160% in the 1970s, and the number of nations that were rapidly catching up to the West rose to 28, compared with the average of 22 in the typical decade. In the 1980s and 1990s, when commodity prices stagnated, the number of rapidly converging nations fell to just 11. Commodity prices then doubled in the 2000s, another golden age for convergence, with 37 nations catching up at a rapid pace.

But commodity-driven economies such as Russia and Brazil tend to stop catching up as soon as commodity prices spiral downward. According to the World Bank, of the 101 middle-income economies in 1960, only 13 had become and still remained high-income by 2008: Equatorial Guinea, Greece, Hong Kong, Singapore, Ireland, Israel, Japan, Mauritius, Portugal, Spain, Puerto Rico, South Korea and Taiwan. Of those 13, only Equatorial Guinea is a commodity-dominated economy.

Last decade's mass convergence was a freak event that caught the world's imagination."

The things that will ultimately limit the progress of all countries, especially the continuing rapid advance of emerging markets will be social and political factors, like a viable social contract, property laws, an ability to forge a democratic model that fits various social customs, social responsibility and accountability for business moguls, and a commitment to regulation, ethics and transparency in capital markets. Even where countries show gains in these areas for a while, they are difficult to entrench into a national consciousness because of the long histories of corrupt governments and business in many emerging economies.

Emerging market investment opportunities are always present, but how accessible will they be through public markets? Time will tell.